Small businesses trading online are up in arms about a new EU regulation, which states that from 1 January 2015, VAT on digital products will be chargeable in the place of purchase rather than place of supply in the EU.

The regulatory tweak - known as #VATMOSS - is being introduced to stop multinational corporations that trade online - such as Amazon or Google - from diverting all their European sales through low-VAT countries.

However, small business owners claim that #VATMOSS is likely to hurt many UK micro firms selling digital services, including: ebooks, e-courses, recorded training videos, music and audio downloads.

After January 1, whenever an ebook or pdf is sold to a consumer in the EU (digital services for businesses are not covered by the new arrangement), the seller is automatically liable for VAT MOSS and must therefore also waive their UK "de minimis" threshold - and apply VAT to everything they sell, not just the digital services.

The new law will affect thousands of sole traders. These companies have two options. They they can register for VAT in every EU member state where they have customers, which could be burdensome but does mean they can take advantage of the domestic threshold for their UK sales. Or they can set up a ‘Mini One Stop Shop’ (hence, “VAT MOSS”) by registering for VAT in the UK. This then funnels the VAT payments to the rest of the EU states.

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This is complex as the firms will need to split their business between sales to EU customers and UK customers to ensure that they only pay VAT on the supplies to customers in other member states and do not pay VAT on their domestic supplies.

According to Carla Watkins, who runs stationery subscription business Ink Drops, the absence of a threshold to protect tiny businesses from the VAT charge is threatening to kill her enterprise.

"We'd planned to expand into downloadable products from December," she told the Telegraph. "I had planned to launch an e-course in January. Though I've worked on it for months, it now falls under these rules. Even if I could find a way to capture the correct information, it's simply not worth the extra time and hassle admin for VAT compliance - we are now being held to the same corporate compliance procedures as giants like Amazon.

"In one fell swoop, they're stifling innovation and cross border trade, and forcing people to close their businesses - all for the lack of consultation, clarity and communication."

Watkins was one of hundreds of entrepreneurs who took part in an online Twitter protest yesterday, using the #VATMESS and #VATMOSS hashtags. Many have announced plans to halt the sale of digital products to avoid losing all their profit on VAT.

Because of #VATMOSS#VATMESS I will likely stop direct digital sales to customers & use only big corporate platforms. Nice one @HMRCgovuk

"Most of us taking part in the Twitter protest are turning over £100 to maybe £10,000 a year, run our businesses entirely by ourselves and often alongside a job, childcare, caring for a parent and so on," said Watkins.

"These businesses are structured with automated purchase and delivery, which makes creating and selling low priced information products possible. If we have to re-insert 'human intervention' into each purchase, it becomes rapidly unworkable."

A petition has now been launched online, demanding that Business Secretary Vince Cable intervenes and "upholds the existing VAT Exemption Threshold for businesses supplying digital products". It currently boasts almost 6,000 signatures. There are an estimated 460,000 sole traders in the UK, according to the Office for National Statistics.

Mr Cable's department said the issue came under the remit of HMRC. A spokesperson for HMRC commented: "New EU rules were brought in to remove unfair competition between online traders registered in EU states with very low VAT rates and traders based in member states like the UK with higher standard VAT rates.

“The new rules mean that digital service companies selling to EU consumers will be taxed where the consumer lives, rather than where the supplier is based. This means that businesses have to register for VAT in each member state where they have customers.

"To make it easier for the UK’s smallest businesses to comply with the new regulations, we have set up the VAT Mini One Stop Shop (VAT MOSS). Businesses can register for this new service, which does the hard work of registering for VAT in each member state so that small business don't have to do this themselves.

"UK consumers of these services will pay UK VAT, no matter where in the EU the supplier belongs, which means levelling the playing-field for all businesses selling to UK consumers, wherever they are based.

“If a business uses an online portal or e-marketplace, then the e-marketplace is responsible for accounting for the VAT. We are aware that a great many micro-businesses do this already and are unaffected by the changes.”

John Allan, FSB National Chairman said of the furore: “Although these changes are an important part of the battle to make large companies pay their fair share of tax, they are proving a shock for some small firms who are trying to build exporting digital businesses. We are already hearing from members who are very worried and want to know what to do about it.

“Those not already registered for UK VAT will face hassle and extra costs. It’s important the burdens of the new arrangements are minimised and firms are given the support and advice they need to weather the changes successfully.”

Emma Jones, founder of small business network Enterprise Nation, added: "We've been busy supporting record numbers of start-ups to build and grow a solid business trading globally as well as in the EU, only for them to be knocked sideways by MOSS.

"Manning up to this new and significant level of bureaucracy will be destructive for micro firms and mean many never get off the ground. The current VAT threshold exists for a reason - to protect firms when they are small. We'd like to see the Government pause, review and assess the impact before they go ahead."

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